Dodd-Frank: Stimulus for Regulators

Remember the Nancy Pelosi-like quote from Democrat Sen. Chris Dodd on the Dodd-Frank financial reform bill: No one will know until this is actually in place how it works.

Well, banks and companies now know, and they say it isnt pretty. Nearly 500 new rules by a dozen government agencies, a little more than half still unwritten. Sixty-seven new government studies, and 93 new government reports. Federal deadlines are now being missed for the governments biggest financial overhaul ever, which takes effect October.

New rules are not free. The rules already are costing consumers in higher loan fees, higher bank card fees, and vanishing free checking, as bankers pass along its costs to consumers, warn bank industry groups.

And it could potentially cost jobs and business investment, says a joint letter to the Senate from 180 companies, including Ford Motor (F), Boeing Co. (BA), Procter & Gamble (PG) and Walt Disney (DIS). Dodd-Frank has tighter rules for derivatives, which companies use to manage risk. That is causing companies to scramble to set aside more capital, which means less funds for job creation.

Yes, Wall Street was reckless. But there was never a shortage of federal oversight rules -- just a shortage of enforcement. And more rules do not make government more effective.

For instance, way before the financial crisis of 2008, the U.S. long had on its books federal systemic risk banking rules to stop big bank implosions, as well as tight capital reserve requirements, the cushions that protect financial companies against a downturn.

For example, in its 1991 reform legislation to clean up the Savings & Loan mess, Congress wrote a "systemic risk" exception, which gave federal regulators the power to protect depositors, both domestic and foreign, and all other creditors from the collapse of a large U.S. bank.

Specifically, the bill said federal regulators could protect depositors if they had concluded that a big bank's failure would impose losses on uninsured depositors and other creditors and "would have serious adverse effects on economic conditions or financial stability," the law says.

The bigger problem is, when regulators did try to step in, they got big footed, and costly turf wars broke out. For instance, when states like Georgia and North Carolina tried to pass tighter laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local units of nationally chartered banks.

And the Office of Thrift Supervision was famous for protecting its turf in overseeing the American International Group, whose colossal failure ranks high on the list of the most controversial U.S. bailouts of all time.

Dollar estimates vary on Dodd-Franks cost.

Bank industry groups and the US Chamber of Commerce warn it may cost consumers at least $20 billion annually, as banks and companies pass along costs. Morgan Stanley predicts Dodd- Frank could depress financial industry growth by up to 6% annually.

For reasons why, take a look at how legislators loosely tossed around undefined words like risky or abusive -- another word for risky. Because the prohibitions against risky activities are so ill-defined, financial companies have pulled back on giving breaks to good, prudent borrowers on interest or fees on mortgages, car loans, and credit cards.

And banks fear the new Consumer Financial Protection Bureau could impede credit, as the unit can create its own rules for banking with potentially little oversight (it answers to the Federal Reserve). The new law also gives the Commodities Futures Trading Commission the power to demand more funds be put on margin for derivative trades for all publicly traded companies, not just banks.

The 180 companies who wrote to the Senate last year say that move could result in the loss of 100,000 jobs and cost $269 million per year per company.

Dodd-Frank also slashed debit card interchange fees, but banks warn theyll either pass the billions of dollars in estimated costs here back onto consumers, or even lay off their own workers.

That, and new restrictions on overdraft fees, has banks yanking free checking. The bill also lets the FDIC levy fees on banks and nonbank financial institutions to cover the cost of bailouts, again likely passed onto consumers or workers.

Meanwhile, Dodd-Frank gave trial lawyers their cut, as the Securities and Exchange Commission and the CFTC get to dole out whistle blower bounties for every publicly traded company, not just banks, at up to around a maximum 30% of settlements, meaning more lawsuits.

Worldwide capital rules set down under the Basel accords has the Institute of International Finance now saying new global bank rules could force banks to come up with $1.3 trillion in additional equity. It predicts the cumulative effect could push up interest rates on loans by 3.6 percentage points over the next five years, and cut global gross GDP by 3.2% by 2015, and 2.7% for the U.S.

The Institute, which is backed by the worlds big banks, predicts such rules may levitate loan rates between four and five percentage points in America. Possibly overstated estimates, given this is a banking group, but it appears the hit will come nonetheless.